10 April 2024

At the Money: Staying the Course

1Frameworks

8Insights

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Frameworks in this episode

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Stay-the-Course Investing System

Build a risk-fit plan, ignore market noise, and rebalance against emotion

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 2

Myth Buster03:07

Why Ten Years May Still Be Too Short to Judge an Investment

Investors often interpret three to ten years of weak returns as proof that an asset has failed. Swedroe counters that almost every asset can endure a decade of poor performance and cites exceptionally long periods when major stock categories trailed safer assets.

Three disappointing years can provoke premature selling.
Risky assets can underperform for ten years or longer.
The S&P 500 experienced multiyear periods of underperformance versus Treasury bills.
Long-horizon institutions can also see risky assets trail long-term Treasuries.

“five years is not a long time and ten years isn't even a long time”
Larry Swedroe · 03:12

“almost every asset goes through at least ten years of poor performance”
Larry Swedroe · 03:29

#time horizon#underperformance#stocks#treasuries

Myth Buster05:36

Missing the Worst Market Days Can Also Mean Missing the Best

The promise of avoiding only the market's worst days ignores the difficulty of identifying them in advance. Large positive returns often occur near large negative returns, when policy responses, short covering, and reversals can produce sudden rallies.

Identifying the worst days beforehand is nearly impossible.
A substantial share of returns occurs during short, unpredictable periods.
The best and worst days often cluster together.
Exiting during panic can leave an investor absent for the rebound.

“The odds of your identifying those days are close to zero.”
Larry Swedroe · 05:47

“A huge part of the returns happen over very short periods”
Larry Swedroe · 05:58

#market timing#best days#volatility#short covering

Hot Take· 1

Hot Take11:47

If Most Professionals Underperform, Part-Time Stock Pickers Face Long Odds

Swedroe challenges individual investors to identify the durable advantage that would let them beat highly trained, full-time professionals. He cites long-run evidence that more than 90% of active managers underperform before taxes and that recent manager success does not reliably persist.

Professional investors employ extensive financial and quantitative expertise.
More than 90% of active managers are said to underperform over the long term.
Recent outperformance provides little information about the next period.
Part-time investors should not assume they possess an unidentified edge.

“over ninety percent of the active managers underperform”
Larry Swedroe · 12:10

“What advantage do you have over these geniuses who get to spend one hundred percent of their time doing it”
Larry Swedroe · 12:29

#active management#stock picking#manager persistence#investing edge

Explainer· 3

Explainer02:42

Why Investors Mistake Recent Performance for a Permanent Trend

Swedroe identifies recency bias as a primary reason investors abandon sound plans. Investors project the latest boom or decline indefinitely, whether the fashionable theme is AI, biotechnology, or dot-com stocks.

Recent performance feels more predictive than it is.
Popular investment themes change across market cycles.
Extrapolation encourages investors to buy after prices and enthusiasm rise.
The same bias can cause panic selling after declines.

“Investors tend to project what's happened in the recent past and definitely into the future.”
Larry Swedroe · 02:45

“today AI is hot, so they think AI will be hot forever”
Larry Swedroe · 02:54

#recency bias#behavioral finance#ai investing#market cycles

Explainer07:03

Markets Often Bottom Before a Recession Is Officially Declared

Swedroe uses post-1980 recession evidence to show that recession announcements are poor timing signals. In four of six recessions, the market had already bottomed before the recession was declared, so waiting for official clarity could mean selling after the decline and missing the recovery.

Investment decisions should rely on evidence rather than pundit opinion.
Recession declarations lag evolving market expectations.
Four of six post-1980 recessions followed an earlier market bottom.
Predicting the economy is not equivalent to predicting asset prices.

“you should make decisions based on empirical evidence, not opinions”
Larry Swedroe · 07:11

“The market has bottomed out before the recession was declared.”
Larry Swedroe · 07:29

#recessions#market bottoms#economic data#evidence

Explainer09:45

Volatility Is the Price Investors Pay for Higher Expected Returns

Market volatility is not merely a defect to eliminate; it helps create the equity risk premium. If stocks rose reliably without meaningful danger, investors would not demand returns above those available from Treasury bills or certificates of deposit.

Investing requires accepting risk.
Volatility supports the expected return premium on equities.
Risk-free stock returns would attract capital and compress expected returns.
The problem is not volatility itself but selling in response to it.

“Volatility is a good thing.”
Larry Swedroe · 09:58

“If stocks would always go up, then there'd be no risk and the equity risk premium would disappear”
Larry Swedroe · 10:05

#volatility#equity risk premium#risk#expected returns

Story· 1

Story04:52

The 2020 Recession Shows Why Economic Foresight Is Not Market Foresight

Even a correct prediction of the 2020 recession would not have identified a profitable exit and re-entry sequence. The market bottomed before the recession unfolded in the economic data, then rebounded sharply while conditions still looked dangerous.

Economic contractions and market bottoms do not occur simultaneously.
Stocks can recover before economic data improves.
Government and central-bank responses can rapidly change expectations.
Correctly forecasting a recession does not reveal when to re-enter stocks.

“the market bottom down well before that happened”
Larry Swedroe · 05:05

“That's a great example of why you don't panic.”
Larry Swedroe · 05:21

#2020 recession#market timing#recovery#fiscal policy

Takeaway· 1

Takeaway08:15

The More Investors Trade, the Worse Their Returns Tend to Be

Research cited by Swedroe associates greater investor activity with poorer performance. Trading adds expenses and taxes, while Morningstar's investor-return data indicates that poorly timed cash flows cause investors to underperform the funds they own.

Frequent action correlates with lower investor returns.
Trading increases expenses.
Taxable transactions can create additional performance drag.
Investor cash-flow timing can underperform the underlying fund.

“The research does show that the more people act, the worse their returns are.”
Larry Swedroe · 08:15

“The more they trade, their. Worse their returns are as they drive expenses number one, and they pay more taxes.”
Larry Swedroe · 08:20

#trading#investor returns#costs#taxes